Singapore is a threat to the national security of the US

Prime Minister Lee Hsien Loong should go on TV and broadcast to his countrymen that Singapore has "arrived". The mighty US is scared of little Singapore. Perhaps a national holiday in Singapore will be declared to mark the event !

I am referring to the US government blocking the bid by Broadcom for the takeover of Qualcomm, on the grounds of national security. Broadcom is a Singaporean company (never mind that Broadcom had offered to move its headquarters to San Jose if the deal went through). Qualcomm is an American company. So Singapore is a threat to the national security of the US. Great !

The US government is giving a specious argument to justify national security. According to the government, Broadcom would cut R&D spending after it took Qualcomm over.  This would affect the development of 5G technology. Instead Huawei would become the leader in 5G. Huawei is a Chinese company. Therefore the US would be dependent on China for its mobile networks. That is the threat to national security.

That is an even more laughable argument. Qualcomm is an important player, but not the leader in the development of 5G in the first place. Have you forgotten Cisco ? Intel ? AT&T ? Samsung ? Ericsson ? And innovation is not the monopoly of anybody - even a rudimentary understanding of business should tell you that. Innovation comes from the strangest of places. If Qualcomm slashes R&D, does anybody seriously think other US companies will not succeed in 5G. If the US was solely dependant on Qualcomm, it was screwed long ago.

And why is 5G technology a matter for national security ? If this is truly the case with wireless technology, China's national security has long been compromised  because of US leadership thus far. Why is ownership of 5G technology and standards so  worrying ? Is the argument that Huawei will get a monopoly of technology and therefore all US companies will have to buy telecommunication equipment only from them and therefore China will have a backdoor entry and control over the entire US telecommunications infrastructure ? That stretches incredulity to the limit.

There's an interesting subplot to this. In the midst of the drama with Broadcom, Qualcomm  itself  is currently trying to take over NXP - another semiconductor company. That deal is awaiting clearance from Chinese regulators. Fat chance of that happening now. The people really screwed by these developments are Qualcomm shareholders - they don't get NXP and they don't get to be bought out by Broadcom at a stiff premium. And before you say you don't care about shareholders, let's just note for the record that US institutional investors , including mutual funds and pension funds, hold nearly 80% of Qualcomm stock.

No, this is not about national security at all. These days it appears you can claim national security for anything - even steel and aluminium tariffs. This is pure and simple economic nationalism. We don't want an American company to be taken over by "Chinese looking people". That's it.

The current US administration is supposed to be a Republican one.  Standing for free trade and non interference of government into business. Has ideology, beliefs and policy ceased to matter at all ?

Read More

Learn from history - Steel tariffs don't help

The US has been there before many times. And yet they do it again and again. Granted that logic and thoughtful action is not a feature of the current US administration. But still, you would have thought they would have read up what happened when they tried it last time.

I am referring to the announcement today that the US plans to impose a tariff of 25% on steel imports.

George W Bush tried the same tactics in 2002, with an eye on the same political prize - voters in Pennsylvania and West Virginia.  He imposed 8-30% tariffs on imported steel . At that time the target was European steel. Europe promptly took the US to the WTO and won sanctions of  some $2 billion. More tellingly, the politically astute European Union threatened retaliatory tariffs on oranges (goodbye Florida votes) and cars (ta ta Michigan votes).  Meanwhile steel prices in the US surged, screwing industries that buy steel. A later study concluded that 200,000 jobs were lost in the US as a result.  Bush retreated and called off the tariffs in 2003.

His father George HW Bush , and his predecessor Ronald Reagan tried various forms of it too. Reagan famously tried quotas on cars (at that time the target was Japan). The end result of that was that car prices went up by $1000 between 1982 and 1984 and the auto industry actually lost 60,000 jobs as a result of the quotas.

Obama indulged in steel tariffs too. His target was China. But that administration did it selectively - huge tariffs, selectively on products and against companies from China that were dumping.

It is not clear what the current administration is trying to achieve. Presumably their target is China , the current bogeyman and indisputably the cause of depressed world steel prices because of overcapacity. But China exports not much steel to the US possibly as a result of the Obama era actions. It is the 11th largest exporter to the US occupying a small portion of US imports - even India is above it in the rankings. The biggest exporter of steel to the US is Canada, followed by Brazil. Is the US trying to screw Canada ?

Why pick a trade war with Canada of all the countries. The US has a  deficit of $ 12 bn in goods and a surplus of $24 bn in services on a $ 700 bn two way trade. Overall the US has a surplus with Canada. And you want to provoke a war with them ? Yes, the current administration has launched a war on NAFTA, but even by that perverted logic, the target must be Mexico and not Canada.  Canadians are not fools . Selected tariffs from Canada  on Vehicles (bye Michigan) and Agricultural Produce ( adieu Ohio) and we are back to reliving the George Bush experience.

Albert Einstein is famously quoted to have said " The definition of insanity is doing the same thing over and over again, but expecting different results.” But to avoid that, you have to read history to determine what has been done before. Well, in the current administration, reading history is too much to ask. They would make a "yuuge" improvement if they could just begin with reading !

Read More

Piss off US Government

Disclosure : This blogger is hopping mad and this post is written in a state of fury . Readers beware !

Why is it so difficult for the United States to understand a simple principle - the laws of the United States apply to the geographical boundaries of the country. It does not apply globally. It certainly does not apply to me.

The trigger for this rant is the case between the US government and Microsoft that is now up before the US Supreme Court. The case involves the US government demanding that Microsoft give up emails of foreign citizens stored in its server in Ireland. Microsoft refused. Hence the case. As the case wound up through the layers of the US justice system, two lower courts ruled for the US government. However the Appeals Court in New York ruled with Microsoft. Now its in the Supreme Court.

The US government's position is that Microsoft is a US company and therefore its laws apply worldwide - a notion that is seductive, but flawed. We've been there many times before. What is a "US Company" ? Is it because it is headquartered in the US ?  If that is the logic, then its easy to beat it. My contract when I use Microsoft services can easily be modified to be with Microsoft India, an Indian company. That will make it outside the US jurisdiction.

Wait a minute, will say the US worthies. Microsoft India is a subsidiary of Microsoft US. So ultimately it is a US company. So, is beneficial ownership the norm ? That's easy to refute too. Who are the shareholders of Microsoft US ? Bill Gates holds most of the shares but there are foreign entities as well. Take Citibank. The largest shareholder is the Emirate of Abu Dhabi. The second largest holder is Prince Alwaleed of Saudi Arabia. So , Citibank is an Arabian company subject to GCC laws ?

Complicating the matter is the obsolete US constitution. The constitution , which  Americans swear by, is written in prehistoric times. They have a system where the constitution can never be amended. And they have packed the Supreme Court with "originalists" (RIP Antonin Scalia), who interpret the words literally. Nobody ever thought of globalisation and the Internet when the US constitution was written. The protection is only under the Fourth Amendment which relates to unreasonable searches and seizures.

The country actually most pissed off by all this is Germany which has strict privacy laws. The German Government has declared that if the US chooses to read every email and access every data, it will simply stop using "American" companies altogether.

Just because you can do something does not necessarily mean that its a good thing to do. Here is a poser to Americans. Consider a situation where E Bay is acquired by Jack Ma (an entirely plausible scenario). Alibaba is a Chinese company. So if the Chinese government decides to monitor every transaction on E Bay and required Alibaba to hand over all details to it. Would Americans take to that meekly ? 

The right thing for America to do would be to execute treaties with other governments on data sharing and then operate under the framework. Sure, that's difficult. But that is the right thing to do.

The US won't do that of course. It has never done that. Principles of natural justice apply only when convenient. They poke their ugly noses into every aspect of my life - I am still signing the damned FATCA forms . I can only rant and rave. Hence the title of the post.

This post is being stored on a Google server in the US. Presumably this will be handed over to John F Smith II from Topeka, Kansas (the American equivalent of Ramamritham). I hope he can see my middle finger !

Read More

Wooing HQ2 ? Yuk !

If you are an American, here's a a nice issue to distract you from your fixation about you know who and direct your attention to a different issue you can get all worked up about.

Witness each city falling over each other and doing the most stupid of things to land HQ2. Tucson Arizona, where one of the readers of this blog lives ,  uprooted a 21ft cactus and tried to deliver it to HQ1. The mayor of Kansas City actually bought one thousand items from the company in HQ1 and wrote a review of each one of them. Mayors of cities are looking silly in videos that they have made asking Alexa where HQ2 is going to come up and Alexa answering of course, the city they are mayors of. Shall I go on ?

If you are wondering what all this hullaballoo is  about, this is all to do with attracting Amazon's second head office. Amazon is based in Seattle (this is HQ1). They want to create a HQ2 somewhere else. And why are cities willing to stand in a line and kiss Bezos' ass (cue the nod to the awful American version of the Queen's English !). Because he is promising to invest $5 bn and create 50,000 jobs. How did they come to this magic figure of investment ? Because he says the average salary of the jobs created would be $100,000. 

The antics of Tucson and Kansas City are harmless on their own. HQ2 won't come there anyway. The real danger is the big cities offering tax breaks to Amazon. Without a doubt this will happen.

This is a terrible idea. Cities and states that do sweetheart deals to tempt businesses into moving are doing an appalling act of profligacy.  This is worse than a bribe.  Think about it - this is a perfect way of taking money from the poor (remember indirect taxes are not progressive and a fair amount of the state revenues in the US come from indirect taxes) and giving it to somebody who does not deserve or need the money. One city does this , and the next city will do the same for another company.  And before you say Bingo, everybody has been given a dole.

The right way to attract companies is to do the boring things - create infrastructure, make a talent pool available by vigorous education and training, attract outsiders by making it a great place to come and live, have a favourable business atmosphere in the form of ease of doing business and reasonable tax rates.  That is when companies will come and stay on. That's why New York in Finance and the West Coast Cities in technology are what they are.  Not because they gave tax breaks.

If you are an American, you should vigorously protest against your city doing a sweetheart deal with Amazon.  

For Indians, who can look at all this with an amused smile; we have of course been long guilty of doing such deals with companies. But I want you to get agitated in a different angle. The capital of the IT industry in the country did all the right things 30 years back - great place to live in, pleasant weather, abundance of talent, a cosmopolitan place for people to come, etc etc. It did not give a tax break. And yet every IT company worth it's salt came.

And then this city let it all go to seed and become the appalling wreck of a city that it is today.  This is the best way to drive every company out. No member of the Homo Sapiens species will ever come to this place again. Instead the entire population has mutated into Pithecanthropus Erectus, which being extinct, is delighted to be able to come back into existence even if condemned to living in a hellhole ! How does this blogger know of such a mutation ? Because he has mutated himself !

Read More

I should have the right to vote out Trump

I am an Indian citizen. I have no right to vote in the US elections. That's fine - US citizens can make their own choices on who to govern them. But when the US starts passing laws that affect the world, expects global compliance and which  have global consequences, then I am not prepared to keep quiet.

Nowhere is the US effect more on other country citizens than in the area of finance. If it starts a war, as it did in Iraq, at least I am not affected too much and its unlikely that the US will start a war with India. But Trump, by the act of trying to roll back Dodd Frank,  is directly affecting me and is therefore fair game in being virulently criticised.

Dodd Frank what ? Yes that's a fair question as unless you are a student of economics you may not have come across the Dodd Frank Act. Here's the context in layman terms

- Remember the financial crisis of a decade ago. It was caused by global financial behemoths (mainly US based) going crazy
- Post the crisis, the Obama administration enacted the Dodd Frank Act to govern the conduct of financial institutions. Massive compliance requirements were brought in and severe restrictions and policing was introduced on what they could and could not do.
- At the time, the Republican Party was in the phase of "Hell No". Therefore the law was not passed on a bipartisan basis. It was mostly a Democratic Party legislation.
- Republicans hated it, largely because they hated anything Obama did. The big finance companies and banks absolutely loathed it.
- The law is complex, fiddly, adds huge costs of compliance and is an absolute nuisance for those in the finance business. All true.  But we have seen what havoc they can wreck on the world if they are let loose. So their complaints should simply be met with a stonewall.
- This is one perfect example of a bad law being infinitely better than no law.
- The consequence of another financial meltdown is that I, an Indian citizen, will have to pay for it even though Indian financial institutions played absolutely no part in creating the mayhem. Like it or not there's no "Buy American" in finance. Finance is global.

Trump is now trying to loosen the provisions of the Dodd Frank Act.  Thankfully he cannot repeal it as he needs 60 votes in the US Senate and he does not have them as the Democrats are now the party of "Hell No". But he can dilute it considerably and that's what he is starting to do. An Executive Order came out on Friday. Thankfully for now,  the Order is just asking somebody to do something , as most Executive Orders thus far have been.  Nothing really has happened.

But it will happen. Trump's cabinet and advisers are full of Wall Street types. They have a vested interest in undoing the Act .  They must be resisted with every force. And I'll loudly call for Trump to be resisted on this one. As should you, whatever nationality you are. It affects you and me.

Dodd Frank has lots of faults. It's 2300 pages long. That alone is enough to tell you that Ramamritham has run amok. BUT, before anybody tries to do anything with it, he has to prove that it will improve controls and not dilute it.

For, you see, if you want to be really scared, do not think of nuclear war with North Korea. Or Arctic melt down. Or an asteroid hitting the earth. Get mortally terrified with just this one statistic. The total value of financial derivatives in the world at this moment is some $1.5 quadrillion. By comparison the world's  GDP is $80 trillion

Read More

Buy American and Hire American

When this blogger started blogging in 2009, his very first post was titled "What is American goods, anyway ? " Eight years later, when returning back from a two year hiatus in blogging,  the same theme resurfaces as the second innings of blogging is started.

The trigger for this post is of course Trump's executive order titled the same as this post, which he signed with much fanfare three days ago.  The order , of course, is pure bombast and is only meant to show that the President is doing "something". It simply orders the Secretary of Commerce to tell the world what the hell this means in 60 days and orders sundry other Ramamrithams to specify how it will be implemented  in 150 days. I was not aware that you need an Executive Order to tell people to do their jobs, but apparently in the world of alternative reality, that is required.

Precious little, other than nuisance value, will come of it. For you see, in today's globalised world of supply chains it is almost impossible to determine what is "American" as my first ever post argued.  If "value added" is the yardstick for measuring national origin, then your iPhones are as American as mom and apple pie even though they are entirely manufactured outside the US. If the physical act of manufacturing (read final assembly)  is the yardstick, then the iPhone is Chinese while BMW is American.  If the entire supply chain has to be in the US, most products will simply disappear off the shelves as some of the raw materials and components are simply not available in the US and have to be imported.

The Executive Order gives some clues to the warped thinking - apparently they would like  that "for iron and steel products,  all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States ."  US iron and steel has been on decline for decades. Only an idiot will set up steel capacity in the US - after all the next President can sign another Executive Order to the opposite. Not a single new job will be created. What will only happen if this pig headed policy is even half tried is that the existing US steel plants will jack up their prices. The American consumer shall pay.

The problem of disappearing jobs is a real and serious one, but there are no easy fixes. It cannot be tackled by trumpeting economic nationalism. It certainly cannot be solved by sitting on the toilet seat and tweeting whatever comes to your mind.

By the way, the GOP was meant to stand for free markets and trade. It would have been appropriate if a President Sanders were to try something like this. But a Republican President ?

PS : Its nice to be back. Sorry for going away for two years - I was dabbling in a social enterprise in the interim, but am now back in retirement, and therefore back to blogging.

Read More

I agree with Elizabeth Warren !

Readers of my last few posts on TPP would have noticed my complete disagreement with one Elizabeth Warren - junior Senator from the Bay State of Massachusetts. In this blogger's humble opinion she is a card carrying member of the loony left. And yet, here is proof that even from the loony left, an occasional wise word may arise (granted this is as rare as a bright sunny day in the great state of Oregon, but ..... !)

Her utterance was actually from last year - "The message to every Wall Street banker is loud and clear. If you break the law you are not going to jail", said the good lady. Well, let us pass lightly over the fact that there are no banks on Wall Street and that the New York Stock Exchange is not the same as banks. She has a point, which has been doubly proven in the events of lastweek.

It was a familiar story. Six banks agreed to pay $5.6 bn in penalties for manipulating currency markets. Five of the six admitted to the crimes. And yet, there is not a single banker going to jail. In fact , in all the settlements (LIBOR rigging, abetting client tax evasion, etc etc), the penalties are in billions of dollars. And nobody has gone to jail.

The details of the current forex manipulation case are not the purpose of this post. The  banks formed a cartel and used coded communication in online chat rooms to rig the daily fixes of the exchange rate between the Euro and the US dollar. We won't get into the details. Suffice to say that this is a fraud, and that if prosecution were to be brought against the perpetrators, they would go to jail. Yet this never happens. Why ?

Firstly it is hellishly difficult to prosecute banks. They have access to the best lawyers, tons of money, and their actions are of such a highly specialist nature that proving the fraud in a court of law is extremely difficult, time consuming and expensive.  Secondly the authorities drool at the prospect of these huge settlements and greed wins them over the principle of criminal deterrence.  Thirdly, even though banks agree to these huge settlements, it is far from clear that a criminal act was actually involved - banks are so terrified about losing a case and having their banking license revoked (an automatic consequence) that at the first possibility, they agree on a settlement however outrageous the amount is and however strong or weak the case against them is.

Look at who wins and loses. The shareholders of the bank lose (after all these settlements are being paid out of their profits). Their customers lose - by rigging forex rates they essentially screwed their customers. The winners are firstly the bank management and the actual employees who committed the fraud. Nothing happens the bank management. As for the employees caught in the act, they get fired allright, but simply join another bank or fund house across the street. Worse, they get to keep their bonuses.

This is an outrageous state of affairs. This will keep happening again and again. Fines, even of such gargantuan amounts, mean nothing to them. The bank committing the fraud must be taken to court. The employees who actally did the deed must be locked up in jail. The bank must lose its license and suffer the consequence. Only such a deterrence will prevent such monstrosities from happening again and again.

In this stand I am in the camp of the said Elizabeth Warren, the Tea Party (they are outraged at this too) and The Economist ! Strange bedfellows, eh ?

Read More

In defence of TPP - Secrecy in Negotiations

One of the biggest criticisms of the TPP in the US has been that the negotiations with other countries have been carried on in secrecy by the US government. US politicians have been falling over to yell themselves hoarse against this. When Wikileaks published confidential negotiation documents in their expose, there was much ballyhoo of how evil the government was.

Stuff and Nonsense. (The Queen would appreciate this remark !!)

I have not read Wikileaks and the very fact that I, an outsider sitting a million miles away with no access to any negotiating document, is able to write this series should be ample evidence that there is no Fort Knox secrecy. The principles with which the US (and every other country) are negotiating are well known and have been well known for years. None of the contentious issues are any different from what the US has been stating and signing in bilateral agreements for the last 20 years. Neither is any of this different from the positions the countries took in the Doha round of  the WTO. The arbitration clause I referred to three posts ago has been touted as a major googly being slipped in secretly through the back door. Bullshit. It has been there in every US bilateral agreement for years. The principles and the US stand have all been open and perfectly well known. You may agree or disagree with them, but you can't say they are secret.

What has certainly been kept secret are the details, the fine print and the negotiating documents. Yes, I know, the devil is in the details. In fact there is an unprecedented levels of security including telling pompous US Senators that they can't take notes - a tactic designed to exploit their infantile memory. You can disagree with this level of secrecy, but it is at least understandable. Negotiations involve give and take and involve messy compromises. When they are made in the glare of publicity, no agreement can be reached at all. Nobody negotiates under the glare of television cameras. Single issue activists and voluble gassy politicians (you know who I am referring to) will pump money lobbying and make so much noise that no agreement is ever possible.  For example the US is currently leaning towards accepting agricultural tariffs being retained in Japan with a quid pro quo that tariffs on Japanese automobiles will also remain in the US. This is an ugly compromise, but there is no way any deal is possible without bowing at the sacred altar of Japanese rice. As it stands the American sugar producers are vigorously lobbying for TPP (since it will protect their domestic subsidies), while the US Chamber of Commerce is furiously lobbying against and are being egged on by Australian sugar exporters. This is just on one minor item - sugar. Imagine the chaos and cacophony if every lobby group were to be shouting at 10000 decibels on Clause 4a, subsection ii of a negotiating document. We might as well not attempt any agreement at all. Anybody who wants negotiations in the full glare of publicity is either a cynical manipulator with a huge self interest or has never done a negotiation in her life (notice the gender).

The second big  controversy is the granting of fast track authority to the President to negotiate trade deals. Fast track gives authority to the President to negotiate a trade deal which Congress cannot subsequently amend or filibuster - they can either approve in toto or reject in toto. Predictably, the biggest noise on this is coming from the good lady. Of all the self serving and pompous stands, this takes the cake.

Firstly the fast track procedure is nothing new. It has been in existence since 1975. Successive Republican and Democrat presidents have been granted this power. This is not some Obama evil invention.

Secondly how, and with who, does any other country negotiate with the US ? You only negotiate with somebody who has the power to negotiate. Who is that person in the US ? What is the use of spending 3 years negotiating with the President when after a deal has been reached, 100 Senators and 435 Representatives can then amend at their will. This is the US Congress which can attach completely unrelated amendments to any bill - they of the crowning glory of killing a human trafficking bill by attaching a clause on abortion. So if the President cannot make a commitment on behalf of the US, then who can ? Does Japan have to negotiate with 535 Congressmen ? Or with a committee of Congressmen ? - imagine negotiating with an American team comprising of Elizabeth Warren, Ted Cruz,  Bernie Sanders and Eric Cantor !!!!!! There is no greater laughable concept than that.

I will conclude this series with an appeal to the Americans I know. You have elected a President. Give him some credit - he is not a traitor selling off Mom and Apple Pie. Sure, disagree with any policy, but be prepared to negotiate and make compromises with the rest of the world . Do not listen to Elizabeth Warren and Ted Cruz - both the loony left and the rabid right will lead you to a hell hole. Not only are they unhinged, they act with zero responsibility. Weigh the pros and cons of any policy in total - there are always positives and negatives. It is easy to throw out any initiative simply because you strongly disagree to a single clause.

The TPP may not be the best deal ever. It is however not a bad deal. It is to America's benefit. You have been the champion of free trade in the world. Your own prosperity arose because of your commitment to enterprise and trade. The world has grown following your footsteps. Do not kill your greatest strength.

Read More

In defence of TPP - Environment and Intellectual property

In this post I'll tackle the  issues raised against the TPP in the areas of environment and intellectual property.

The opposition to the TPP from environmental activists comes from two contradictory positions - one is that any promotion of trade and economic activity leads to degradation of the environment and therefore must be stopped. The second argument is that the TPP does not go far enough to make environmental and climate change issues at the heart of any trade deal.

The first argument is not worth debating, for it is a loony left idea that deserves contempt. Denying the opportunity of economic advancement to the world's poor should be treated as a crime; for that is what it is. It would be far better if these activists were to specify how growth can happen with minimum effects on the environment (for eg what energy sources could be acceptable) and what the trade offs and choices should be. This they do not do and simply oppose everything. Such a position is not worth a shouting match.

The second argument is worth serious consideration. The US over many bilateral trade agreements has been pushing the following principles

* A binding agreement that countries would not lower their environmental standards in order to attract investment

* That their obligations under other multilateral climate control agreements would override any provisions of the Free Trade Agreement

* A long list of prohibited activities - like logging, deforestation, trade in wildlife, etc

In the TPP negotiations, the US is actually on the defensive as internally the Republicans will block any deal that contains significant provisions on climate change. Countries like New Zealand and Australia which are far more advanced on climate change issues are pushing for tighter provisions. These will have to be negotiated through, but given that the US is such an important player, it is unlikely that they would be able to do much progress. The activists are right to push for greater environmental standards. But the TPP is the wrong place to fight this. They should force the US, which single handedly screwed up the Kyoto Protocol, to come with an alternative.

I approach the second issue of intellectual property rights with some trepidation as that would mean arguing with Medicines Sans Frontiers (MSF) , a saintly organisation, which I am neither competent nor entitled to do. The issue is primarily of patent protection to pharmaceuticals. The US would like patent protection similar to what it has inside its own country. This would mean high prices for drugs for a long time in other countries and inhibition of development of far cheaper generic drugs. As this would disproportionately hurt the poor, MSF has been objecting to patent advancement through Free Trade Agreements. It is a difficult and thorny issue on which there are no easy answers . I am ducking this issue as this is not a big issue with the opposition to the TPP in the US, which is the prime theme of this series of posts. To its credit, the US negotiating team is trying to promote the principle  of "active window" - a period of time which would be longer for developed countries and shorter for developing countries when patent protection would exist and after that the country would be free to promote generics. That might be the best compromise.

This is probably an easy post - neither of these issues are ones on which US politicians should  kill the TPP. Despite the lunacy of a not insubstantial number of US politicians, this is unlikely to happen.

Tomorrow I will conclude this series with examining the secrecy surrounding the negotiations which is common cause made both by my good friend and Elizabeth Warren !!

Read More

In defence of TPP - the loss of jobs

The opposition from labour unions in the US ( and labour activists everywhere in the world) to the TPP is that it will lead to the loss manufacturing jobs (read in the US) and therefore it is anti labour. I have some sympathy for the view of the labour unions in the US, but absolutely no sympathy for the "global labour activists".

In every change of  the status quo, including opening up of trade, there will be winners and losers. When international trade is made more easy, by whatever means, the risk of American manufacturing jobs being lost is real. Labour intensive activity will migrate from higher cost locations to lower cost locations - that's an indisputable fact of economics. Therefore there has to be some sympathy for the US unions' opposition to every trade deal with a foreign country.

The balance sheet of wins and losses for the US looks like this. Jobs will be lost, especially in manufacturing. US consumers win in terms of lower costs of products. If international trade were to be substantially reduced, inflation will soar in the US. Prices of all goods will rise to levels which will put them out of reach of many people making it hard for even the poor in the US to enjoy the quality of life they currently have. Increased economic activity leads to rise in taxes for the US government - don't believe all that spin about evil corporations hiding their money overseas ; this is a point I am happy to debate separately. The increased economic activity does create more jobs, but not enough to compensate for the loss of jobs and in any case it is mismatched in terms of skill levels. So the only constituency that has some case for objecting to the TPP ( and every trade deal) is the US labour unions.

The group that deserves utter contempt are the international "labour activists" who are protesting against the TPP.  As we have seen, jobs will be lost in the US, but they will migrate to lower cost, and poorer countries . These are the societies that desperately need economic betterment through jobs.  Secondly, by lowering the cost of labour, there is a defence against machines taking over these jobs. That is why iPhones are still assembled by hand in China and clothes stitched by hand in Bangladesh. In sum total, there are more jobs created and preserved in the world than it would have been if manufacturing were to be done in high costs countries. You would have thought this is in net good for the world.

It is also an indisputable fact that labour is exploited in poor countries.The US, to its credit, through various trade agreements and via the TPP, is trying to minimise this. In particular, US negotiators want TPP members to implement and enforce the 1998 Declaration on Fundamental Principles and Rights at Work of the ILO. This includes the freedom of association, right to collective bargaining, a ban on forced or compulsory labor, the abolition of child labor, and a ban on discrimination in employment. The US also wants countries not to exempt their special economic zones from the labour laws of the rest of their country. These are all sticking points in the negotiations, but this is what the US has been strongly negotiating for.  If there were no TPP, it would be laissez faire for labour exploitation in each country. The TPP at least attempts to get some common protection for labour in every country. And the "international activists" are opposing this.

So yes, international trade will hurt US jobs. It has been doing so for many decades. But if you see it from a global perspective, the world would be a better place with the TPP, than without it. Having said that, I have sympathy for, and would not argue against the opposition of the US trade unions.

Read More

In defence of TPP - the arbitration clause

One of the big issues in a trade relationship involving multiple countries is what happens if a country unilaterally decides to ban a product, or raise import duties astronomically, or take a similar form of unilateral action that dramatically affects the viability of a foreign investor's project. This might go against something that the government itself contractually agreed with the investor. What does the investor do.

The investor can take the government of that country to court, but in many countries of the world  there is no hope of winning, or it would take years in court. After all a government can simply change laws retrospectively (as India often does) and the courts can do little else but enforce them. It is precisely for this reason that the United States for many years has been insisting on independent forums for resolving Investor-State Disputes (ISDs). The US position has been that the legal system of every country outside the US cannot be trusted and therefore there must be an independent mechanism for resolving disputes. In current bilateral trade agreements with 5 of the 12 countries in TPP, the US already has ISD clauses.  In recent years the US has an ISD mechanism in every trade agreement it has signed, bar the US-Australia one. In fact the biggest opponent of the ISD clause has been Australia, rather than the US. In a blatant double facedness, Australia has ISD clauses in trade agreements with developing countries, but refuses with developed countries.

The principle is not new either in the commercial arena or in governmental ones. Every commercial contract has arbitration clauses - parties submit to the jurisdiction of arbitrators rather than courts. This is both cost effective as well as time saving and is universally used in commercial contracts. There are well established global rules governing arbitration - the "capitals" of arbitration being London, New York and Singapore. If each commercial dispute came to the courts, the judicial system in every country in the world will come to a grinding halt - it is partly for this reason that courts themselves encourage arbitration.

It is therefore rich for US politicians, and especially Elizabeth Warren to argue against the ISD clause on grounds of loss of sovereignty. Firstly it is the US itself over successive Republican and Democrat administrations that has championed this principle. Secondly it the US which is usually the gainer in such matters - for example it prevents countries from outrightly nationalising companies and industries, as say for example, Argentina is wont to do. 

Two cases are often used to illustrate how "greedy companies are milking countries" - the Veolia Egypt case and the Philip Morris Uruguay case.

Veolia , a French firm was executing a project to reduce greenhouse gases in Alexandria in Egypt. The firm executed a contract with the government whereby the government would compensate the company for cost increases because of governmental action. Egypt then raised the minimum wages in the country and Veolia then took the Alexandria authorities to arbitration for compensation for rising costs. The matter is in dispute and has not yet been decided. This is a contractual matter and the spin that Warren & Co are mouthing that this is a corporation suppressing minimum wages in a poor country is pure balderdash.

The Philip Morris case is more nuanced. Uruguay passed laws requiring that 80% of the pack contain graphic images and the risks of smoking. It raised taxes, banned advertising, and sponsorships. Philip Morris took this to arbitration on the grounds that this makes it virtually impossible to do business. The matter is yet to be decided. Uruguay is a signatory to an ISD arbitration and hence this came up before the arbitration panel rather than the courts in Uruguay. There  is no evidence that just because it has gone to arbitration  the ruling would be "unfair" or "unjust".

As a consequence of this case, in the TPP negotiations, the US has sought to prevent misuse of the arbitration clause by recognizing each country’s “inherent right” to regulate for health and safety. This will probably get incorporated into the final deal so that unilateral action by governments on grounds of health or safety  cannot be legally challenged.

As far as the US is concerned, the TPP provisions are no different from the existing situation it already has in some 50 odd agreements.  So why all this noise from Warren ? The noise is not because she has a better mechanism for dealing with an investor government dispute. It is in reality because she is against globalisation & trade. That is a different argument and battle.

Read More

In defence of TPP

The Trans-Pacific Partnership (TPP) is a trade deal that 12 countries bordering the Pacific Ocean are negotiating. The countries include the USA, Japan, Australia and Canada, but exclude China. The TPP is being vigorously opposed by a collection of groups - Democrats in the US, environmental groups, labour unions  and even Medicines Sans Frontiers. There is much fear mongering and shrill yelling, especially from US politicians, and this blogger believes a reasoned debate on the real issues would be useful. This series is also in response to this post from my good friend.

Firstly, we must clarify what TPP is. It is an attempt at a trade deal between 12 countries. The WTO was (is ?) an attempt to do a trade deal across most of the countries in the world. The TPP is far less ambitious - it attempts to cover only 12 countries, most of whom see eye to eye on many issues. And yet, this is proving to be very difficult to achieve, with much of the noise in opposition emanating from the US.

Why do we need any trade deals at all ? It is necessary simply to make imports and exports between countries possible. It can be as simple as a Double Taxation Agreement - two countries agree that the same income will not be taxed by both countries. It can be an agreement between both countries not to raise huge tariff barriers that make trade impossible. It can be to respect intellectual property rights in both countries, etc etc. It can be an agreement on a single issue (piecemeal and suboptimal) or a more comprehensive multi issue pact (preferred and in which case it becomes a full blown trade deal) .

In the past countries did bilateral trade deals with one another. This led to a complex plethora of agreements which came in the way of trade, as the world started to become more and more globalised. Therefore countries tried to form groups and do a single trade deal amongst themselves in order to create level playing fields and facilitate trade and commerce between all of them. The European Economic Community is perhaps the earliest and deepest bloc. NAFTA tried to create a far less ambitious trade deal in the Americas. Trade zealots tried to achieve a global deal amongst all countries - first called GATT and then WTO, but this is proving impossible to achieve and perhaps a pipe dream. The TPP is a far more modest attempt by 12 countries, but even this is proving so tough to do.

I hope you would agree that some sort of trade deals are necessary for the globalised world of today. If you are in the camp that says all globalisation is wrong and no trade deals should ever be done at all, then I will not debate the matter with you as our positions are on different ends of the universe. If you accept that trade deals are good in principle, then let us turn our attention to the TPP and the issues which are most objected to by the opponents of the deal.

 * The setting up of arbitration panels to decide disputes, including where a government is a party to the dispute, instead of taking the matter to national courts (This has what got my friend's goat in his post referred to earlier and is also the point on which a certain Elizabeth Warren is making the maximum noise)

 * The fear of loss of jobs in the US , which is the chief complaint of the trade unions

* The fear of increased economic activity creating more pollution and climate change, which is the chief objection of the environmentalists

* The enforcement of intellectual property rights, which is the chief objection of Medicines Sans Frontiers

There is also the added objection in the US that the negotiations are being done in secret by the US government- another issue that has aroused my friend's ire.

I will cover each of these issues in detail in subsequent posts.

Read More

How does an American pronounce Pallagoundenpalayam ?

The most unlikely of bedfellows can come together in the business world. Consider this rather unusual "marriage".

The bride is the city of Detroit. We shouldn't be uncharitable to a bride, but the immediate words that come to mind when you mention Detroit are decay, dilapidated, joblessness,  decline, etc etc. Can any good news come out of Detroit these days ?

The groom is Sakthi Group. Sakthi who ? - even my Indian readers are entitled to ask. It's an unknown, small conglomerate from the South of India. They were essentially a sugar company, but have dipped their fingers into a bewildering array of businesses. They are still small by global standards - some $2 bn in size. One of their businesses is Automotive Components - a business in which Indian companies have excelled and are starting to lead the world. 

Sakthi announced a $ 31 m investment in a manufacturing facility in Detroit to make aluminium castings. GM and Ford are big customers for them and their logic for this investment is being close to customers.  Of course they have milked the incentives and subsidies - some $4 m.  But Sakthi has played the PR angle perfectly. The castings will substitute imports from China. The facility will create 650 jobs over 2 years. They have committed to hire at least 2 ex felons a month ( both a brilliant and a movingly human move). And the site they are developing is a historic school, now closed and left in ruins. Can there be a better feel good story ?

The sight of Michigan Governor Rick Snyder, waving a casting, as he welcomed Sakthi makes interesting viewing. And the Sakthi's chairman calling the marriage a Catholic marriage (meaning,  for the long term), is equally interesting Whether Sakthi will succeed in the most challenging location of all in the US remains to be seen. But you have to give it full marks for daring and boldness. It may fall flat on its face. But it will still have been an interesting experiment.

Meanwhile the American employees have to learn to pronounce Mukasi Pallagoundenpalayam ! That's where Sakthi's auto component headquarters is located in India. Even my good friend Sriram is going to struggle with that !

Read More

Really Walmart ? Plumbing ??

 
Walmart closed down five stores in the US. What's new ? This happens all the time - stores are closed and stores are opened. So what ? What is strange is the reason it was done and the manner in which it was done.

Walmart announced to its employees two hours before store closing time on Monday last week that the stores were closing from the next day.  The reason stated was plumbing problems !! That is the most unusual reason you might have heard for stores to close.

Walmart has a history of treating its workers, shall we say, a little less generously than most other businesses. But , even by their standards, this closure is curious. One of the stores that was closed was at the forefront of a strike a couple of years ago.  The whiff, that this was retaliation against the workers is strong. But the other four stores weren't the leaders of the strike - so why these five ? Where the four simply lumped together to deflect the real intention to get at those b%^&*s who dared go on strike ?

Telling people two hours before shift ends that they don't have to come tomorrow does not appear to be a humanly good thing to do. But there is no place for human feelings  in the business world it seems, at least in Walmart. To be fair Walmart is saying that all employees would be paid two months paid leave when they can apply for jobs in other Walmart stores and that if they didn't succeed in two months, the permanent employees would be paid some severance pay.

The ostensible logic for the short notice to employees is that apparently if you give them a longer notice, they would all steal the store blind ! A more "acceptable" reason is  that they don't have to legally do any better.  Is this what employee relations in Walmart have come to ?

The stated reason for closure is urgent and pressing plumbing problems that have to be fixed. Really ??? Nobody the city or amongst the employees seem to have heard of the "ongoing and pervasive" sewer problems before. No permissions have been sought from city councils for any repairs. Its difficult to believe that the emergency closure of stores is really because the loo is leaking.

Even the most charitable view of the issue has to concede that Walmart could have handled the whole thing better. But this is probably a symptom of the real problem - Walmart management does not rank handling employees with care and concern very highly amongst its business priorities. That's a sad commentary on the business world. If one of the largest corporations and employers in the world, treats its employees as impersonally as a pallet of stock, then it is no wonder that they are hated as viciously as they are. The very word corporation has become a four letter word. And by their actions,  corporations are doing their very best to justify that tag.

What a stink !

Read More

Screw around with Kraft

What do you call something who is passed from hand to hand ? Used goods ? Probably something worse ? Well, that is what we have to call Kraft these days.

With a touch of slight (?) exaggeration, you could say that the land of mom and apple pie, could be stretched to include Kraft too ! Read on to see the list of brands this company owned at one time or the other, and even the Professor - he of the class war against processed foods - would have had one of those some time or the other. Its a quintessentially American company. And yet the way it has been sold and bought and sold and bought again makes somewhat depressing reading.

As is usual with many of the well known companies, there is always a visionary entrepreneur in the beginning. There was a James L Kraft. He was born in Canada, but emigrated to the Chicago in 1903 and started selling cheese from a horse drawn cart. In 1916 they developed a new process for pasteurising cheese, enabling it to be shipped long distances and patented it. Then came World War I, the need to provision the army and Kraft took off. In 1928 came Philadelphia cheese. In 1930 it merged with National Dairy, then the leading ice cream company in the US and became a full fledged Dairy Products company. 1926 saw Breyers, a famous ice cream brand;  1935, Sealtest, another iconic ice cream brand.  It grew and grew and became a globally recognised company and one of the giants of the food industry.

Then came 1980 and the barbarians. Wall Street types seem to have a peculiar fascination for Kraft and it become the favourite darling of deals. In 1980 a merger was engineered with Duracell and Tupperware. Immediately thereafter it sold all the non food businesses including Tupperware, but retained Duracell. In 1988 it sold Duracell to private equity firm KKR. In that mad winter of 1988, when dizzying deals were done, Kraft itself was acquired by Philip Morris (the largest tobacco company in the world) . Philip Morris merged Kraft with its General Foods business (of Maxwell House, Jell O, Kool Aid and Tang fame ) and created Kraft General Foods.  In 1990 they bought Jacob Suchard a big European coffee company and also the owner of Toblerone. In 1993 came Shredded Wheat. In 2000, Philip Morris acquired Nabisco and merged it with Kraft. Into the fold came Oreo, Chips Ahoy, Ritz, etc. In 2001 Philip Morris IPOed Kraft and it became an independent company again. In 2009, Kraft acquired Cadbury. In 2011 it split itself into two companies - the North American Kraft and the global Mondelez. And then last week, Warren Buffett and 3G bought out Kraft and will now run it together with Heinz which they already own.

Whew. That is a dizzying pace of changing of hands. How can a business survive this level of buying, adding, stripping and selling all the time. I wonder what the suppliers, consumers and employees make of all this. Businesses need some stability. Wall Street types doing financial engineering, don't do much for the long term health of the business.

There is one saving grace. Warren Buffett is not a wheeler dealer. He holds for the long term. Maybe Kraft will get some stability now.

Read More

Oh No, you too China ?

The United States believes, sometimes, that it is so unique that it exists in Planet HIP 116454b (discovered yesterday). Some of its laws and practices are completely unintelligible to other members of the species Homo Sapiens. Chief amongst them is its laws relating to guns. A lesser dramatic field is the one on taxing global incomes of Americans (and now even green card holders). This blogger railed about it in the past here.

Now it appears that the Americans are no longer alone in Planet HIP 116454b, at least in regard to the taxation law. The Chinese are also joining them there.

World over, the principle of taxing income is that you pay income tax in the country where you live and not in the country you are a citizen of. So, if you are an expatriate living in another country, you pay taxes in that country of residence. This seems reasonable. You utilise the services of the state where you live - infrastructure, police, defence, healthcare, etc etc. It is therefore only right that you pay taxes to enjoy those facilities.

America believes differently. It believes that you pay taxes where you live (it can do precious little about that) AND pay taxes in America. To control and monitor this, America has enacted the draconian FATCA, which can be considered reasonable only in Planet 116454b.

Now China is proposing to engage in the same stupidity. Actually , it appears the law was always like that in China, except that it just wasn't enforced. Considering that the "law" in China is not what is enforced by the judiciary, but what is the prevailing interpretation of the Communist Party, this in reality is a change in the law. They are going down the same path as the Americans - demanding that other countries hand over information relating to their citizens, and starting to hound them with Ramamrithamesque legislation.

It actually is quite stupid of China to be trying this. The wealthy Chinese who are emigrating abroad all want to give up their Chinese passport as fast as possible and become citizens of America or Australia or wherever. The majority of their overseas citizens who will be affected are the poor migrant workers working in Lesotho or Burkina Faso building roads or constructing buildings. If the attempt is to get at local Chinese stashing their wealth abroad (of which there are plenty), they can already do that and in any case this move is not targeted at those who are Chinese residents anyway.

A real danger is that our own home grown Ramamritham is eyeing all these moves with undisguised glee. Its probably a matter of time (next budget ?) that he will make a similar move. This blogger is least affected - he lives in India and pays his taxes here anyway. It is his overseas friends , who are readers of this blog and have retained their Indian citizenship, who must start to quake in their boots.

Read More

No french fries in Japan

If you go to a McDonald's in Japan, be prepared for no french fries (freedom fries ?). Or, at best, if you smile nicely at the young girl, you might get a small fries. No wolfing down the one tonne abomination called large fries. The end of the world has arrived !! What on earth has happened ?

Well, the problem is not in Japan, but in the US. There is a big mess in the ports on the US West Coast. McDonald's ships frozen fries to Japan through these ports. Shipments are getting massively delayed. McD don't make french fries in Japan at all - all of it is sourced from the US. Hence the problem in Japan.

What is the mess on the US West Coast ports ? Well, almost everything is a mess. They account for more than half of all US maritime trade and the two ports of Los Angeles and Long Beach account for some 40% of US shipping.  There are are a number of problems across all these ports.

Firstly there is a labour dispute going on. The union and the management of these ports have been negotiating for 7 months now and have made no headway. As usual, pay, working hours, etc etc are in dispute. Now the Pacific Maritime Association, the management group, wants President Obama to intervene and appoint a mediator. As if the President has nothing else to do. Solve your problems yourselves, you lot. I thought businesses wanted governments to leave them alone, not intervene. Well, this speaks of the real demands of businesses from governments - leave us alone when the times are good and come in and pick up the pieces when times are bad.

Secondly, as is happening in almost everywhere in the US, infrastructure is not keeping pace. Container ships have doubled in size and yet US ports have made little investments to handle such behemoths. This is a general problem with US infrastructure everywhere - ports, airports, roads, whatever. Everything is slowly going down and there is little money to spend on them. The citizens of the US would rather spend on dropping bombs on others (Defence),  doling themselves out (Social Security) and cossetting the elderly, even if they are comatose (Medicare). The crumbling of infrastructure is slow and therefore incrementally not noticed. It takes an infrequent visitor to see how far the US has slipped. Today, the drive from JFK to Manhattan, is inferior to the drive from Bangalore Airport to Whitefield - and that really says something.

The third problem, of all things, is a shortage of truck chassis to haul containers in and out. I have no idea why this is so. And apparently there are more factors, unique to the region and specific to the industry.

This is a real shame. When economic growth is at a huge premium, surely you cannot afford to lose because of bad planning, poor infrastructure and intransigent unions.

Ah well; Mr Tamaguchi has to simply control his craving for fries. Perhaps the union workers in Long Beach are concerned about his cholesterol levels ! It just goes to show, how in today's interconnected world of business, a completely unrelated problem in one corner of the world might have repercussions in the other corner. And "drastic repercussions" if you are like Mr Tamaguchi looking for his fix.

Read More

The $1000 pill

How do you price a drug ?  Its a question almost impossible to answer without vehement and justifiable criticism, whatever your answer may be. Nothing typifies this better than the absolute storm raging over Sovaldi.

Sovaldi is a new drug introduced as a cure for Hepatitis C, which was hitherto very difficult to cure. Almost a miracle drug with something like 90% success rate.  In six months it has already become the largest selling drug in the world. In these six months, it has clocked sales of $5.7 billion. Its maker, Gilead, has seen a 50% jump in share price.  Fantastic, you would think.

The only fly in the ointment is that each pill costs $1000 in the US. Or Rs 60,000 if you prefer. You need to take the pills for a six week period, twice a day. That's a bill of $ 84,000. In the rupee equivalent it sounds even more expensive - Rs 50 lakhs.

A veritable storm of accusation and counter argument has arisen. $ 1000 a pill ?? That is criminal argue the opponents. The big bad corporate world is simply gouging the sick to make greedy profits. Bad Bad.

Counters the company - the $ 84,000 treatment bill is significantly cheaper than any alternative which can all be proved to be more expensive with lesser chances of success.  This is therefore a cost saving to patients and instead of being deified, the company is being villified, they say.The trouble with this argument is that the alternative is really liver failure.

This being the US of A, there are all sorts of complications. Medicaid, their programme for providing free medicines for the poor, estimates that it would cost it $ 55 bn if every person eligible for Medicaid and is suffering from Hepatitis C is given this medicine. And the law says no drug that has been approved by the FDA can be withheld from Medicaid.  Of course, there isn't the $ 55bn lying around.  It has also been estimated that the premiums for Medicare (their programme for the elderly) could go up by upto 8% on this single drug alone.

Free market and freedom of pricing is a fundamental tenet of the capitalist world. America, to its credit, defends this even under difficult circumstances. The pharmaceutical industry is a special one - most research results in failure and blockbuster drugs are extremely rare. For every success there are probably 100 failures. If you do not allow blockbuster drugs to make very high profits, there will not be the pipeline of innovation. For all the noise from the rest of the world, the fact is that most of medical innovation comes from the US.

What about the rest of the world, indeed. In previous cases phramaceutical companies have been pilloried for pricing drugs so expensive in the third world that the most needy have no access to them. Gilead, mindful of these pressures, has priced the drug at $11 a pill in Egypt. This has resulted in a storm of protest in the US. If you can sell it for $ 11 in Egypt, why are you charging me $ 1000, shout the American customers (insurance companies, actually, for it is they who foot the bill in the US). They are cursing that America is subsidising the rest of the world on medical innovation. Gilead is shaking its head saying heads I lose, tails you win.

So back to the basic question - how do you price a drug. Yes, free markets and freedom of pricing is important. Yes, huge profits are the attraction for costly R&D which mostly fails. And yet when something succeeds, it creates a monopoly and it is an accepted principle in capitalism that monopolies will be regulated by the government. It is also a fact that, unlike in other product categories, the consumer does not have freedom of choice and is in an extremely vulnerable position at the time of consumption.  Difficult issues to grapple with.

The last body you would expect to give a sane solution to this, is the US Senate, filled with pompous gasbags of doubtful literacy and questionable intelligence. But in this case, this blogger is actively looking to the US Senate to provide an opinion. For the issue has been taken up by Ron Wyden , one of the (only ?) respected, principled Senator from Oregon (Sriram take a bow for electing him). He is one of the few capable of producing a position of substance.

What do you think. Even this blogger, a champion of free markets and rewarding innovation, is blanching at the thought of a $1000 pill. The logic may be impeccable. But to swallow Rs 60,000 twice a day .......

Read More

My sympathies are entirely with Argentina this time

Thomas Greisa is an ass. Thomas who , you might ask. This specimen is a Judge of the Southern District Court of  New York. Why should you bother about the "Southern District Court of New York", you might want to know. Unfortunately, the state of the world is that, we have to. For the USA is back to its old game - imposing its laws on the rest of the world.

The problem is Argentina. Remember the many times I have railed against Argentina, here , here and , on the same matter, here. This time my sympathies are entirely with them.

It all stems back to 2001 when Argentina defaulted on its international loan obligations. As is usual in such cases, an agreement was reached with most of the creditors , rescheduling the interest and repayment obligations. The operative word is "most". A few funds simply sold  their debts at a deep discount to whoever was willing to buy them. Up stepped a bunch of hedge funds, whom we shall justifiably call "vulture funds" as the Argentianians have labelled them. This lot have bought up the debt at a deep discount. They have then held out against any settlement and insisted that they be paid in full. They went to court in the US and thus entered  His Lordship  of Southern District Court fame.

Forget all the arguments about a petty judge of a "Southern District Court" imposing his will on a sovereign nation. The worthy has now ruled that the vulture funds should be paid in full, paid before the others who settled and no payment should be made to the others until the vultures have been paid. No less a body than the United States government has backed Argentina, calling Judge Griesa's ruling "impermissibly broad" and raising concerns that it could undermine U.S. foreign relations. The IMF has said that Griesa's ruling could make it easier for a handful of creditors to disrupt a country's efforts to reduce its debt burden. The  pedant is unmoved. He has ruled thus.

The consequence is that Argentina is in default again. They had a payment required to be made to the parties who settled yesterday. They duly deposited this amount which they had to do in a US bank. Unfortunately the judge has ordered that this money be frozen - because Argentina is in violation of his order and have not paid the vultures.

Argentina has basically said that they would honour the obligations of the rescheduled debt, but they are no way going to pay the holdouts in full. In this, they have a case. Restructuring of debt obligations is a common practice everywhere in the world, and more so in the US. The US bankruptcy law, on which the entire business system in the US relies in, has this as a fundamental precept. Business activity in the US, leave alone in the world, will come to a grinding halt if a few vultures are allowed to block any debt rescheduling process.

Why has the judge ruled like this ? Officially he has taken umbrage under the Ramamrithamesque parri passu clause, which is a technicality not worth elaborating. The real problem is that Argentina long refused to accept his jurisdiction over a soverign matter , and when it was forced to, basically showed him its finger. It is a dangerous strategy to show the finger at such a man. He has basically showed Argentina the finger back.

Pointed fingers apart, the original problem was of course Argentina's ridiculous management of its economy, piling of debt and reaching a point of default in the first place. In this, they are of course, not unique. Other notable members of the club - Greece, Portugal, Cyprus, Ireland keep them good company. India is also making every effort to join them. You could argue that the US is also an honorary member, given the levels of its debt. I wonder what the reaction would be if Judge Li Ping of the Second Sessions Court in Beijing ruled that the United States had to pay Chinese bondholders before Social Security cheques were despatched to US citizens. Perhaps he could cheekily rule that the bondholders must also be paid before the Medicare claim of Thomas Greisa is honoured.

The only beneficiaries out of this decade old saga are the lawyers. Imagine the fees they must be raking up.

Read More

Burn the green card !

Beware, if you are a US citizen, or a green card holder,  living abroad. FATCA is on you !

FATCA stands for the Foreign Account Tax Compliance Act and is the latest weapon unleashed in the awful American tax code. On measures of awfulness, FATCA must be a contender for one of the worst pieces of legislation ever passed. It takes America's unilateralism - something this blogger has long railed about - to a new level.

Basically FATCA is an imposition of its tax laws on every financial institution in the world, wherever they may be. Every bank, even in Timbuktu, is required to report to the US authorities, details of bank accounts and transactions of all US persons (citizens and green card holders). If they fail to do so, they would essentially barred from doing any business in the US. Terrified of being shut out of US markets, almost every country of any standing has signed bilateral agreements with the US to this effect. Did I mention the word, bully ?

All this arises from the stupid concept that prevails only in  America, and in no other major economy in the world. America taxes its citizens on global income, even if they lived entirely abroad and earned all their income abroad. So such citizens pay taxes in the country where they live in AND to Uncle Sam.  In every other major country, depending on your residency, you are taxed on where the income arose only; not on global income.

The ostensible reason for FATCA is to go after US citizens who are hiding their income overseas and avoiding taxes. While that may be a fair objective,  it suffers from two major flaws - the first that you want to tax global income and second that you are simply trampling on every other country, just because you have the capability to do so.

FATCA came into effect three days ago. It will have major ramifications for anybody connected to the US, but living abroad. Consider the question of privacy. America requires every country to report transactions, irrespective of  the country's privacy laws. And yet if the same country turned back to the US  and asked it to report similar data for its nationals, the US will tell it to go away citing privacy considerations. Did I mention the word hypocrisy.

All sorts of unintended consequences are emerging. Some US citizens living abroad are considering surrendering their US citizenship. The rate of surrender, though still small, has quadrupled since FATCA came on the horizon.  Some foreign banks are basically telling US citizens  to go away and not have accounts with them - they simply don't want to get squashed by the strong arm of the US. Some employers overseas are turning away US citizens, considering them not worth the bother.

Consider the US green card holder living in India. Many take this only to escape the brutal visa regime. Parents of children now living in the US maybe. Now they are caught in the FATCA net.

This blogger is reminded of a famous cartoon in The Economist many years ago. The Economist was commenting on how desirable the US green card is even for ostensible haters of the Great Satan. The cartoon featured a rabid mullah, yelling Death to America in a protest somewhere in the Middle East - and he whispers as an aside to an American journalist - "Can you get me a green card "!

Maybe the time has come to change the punchline. Can you burn my green card !

Read More